Commentary and analysis of commercial, business and intellectual property (IP) law, sports law, complex civil litigation and occasionally a general legal tip.

Tuesday, June 5, 2012

The importance of F.O.B. Destination.

If you deal in goods, chances are that you are familiar with the terms "F.O.B. Origin," and "F.O.B. Destination." Alternatively, you may hear the terms, "F.O.B. Factory", "F.O.B. Shipping Point," and "F.O.B. Jobsite." Part 5 of UCC Article 2 deals with tender, delivery, shipment and risk of loss as it pertains to F.O.B. F.O.B. means "Free on Board," although one may also hear it as "Freight on Board." F.O.B. specifies whether the buyer or seller bears the risk of loss to the goods during shipment, and where responsibility is transferred.

In many cases, there is not a breaching party. The seller dutifully tenders the goods to the freight carrier or other method of transit, and the buyer is not aware that the goods may be damaged in transit. If the goods are F.O.B. Origin, the risk of loss or damage to the goods in transit rests with the buyer. If the goods are F.O.B. Destination, the risk of loss or damage to the goods in transit rests with the seller. To the buyer, having goods shipped F.O.B. Destination is a sort of insurance while they are in transit.

People may think this is not fair, and it is not. It is not fair that the buyer of goods who has no control over damage in transit be responsible for paying to replace goods damaged. But this is exactly what happens. It causes enormous problems in business relationships, as the buyers sometimes are so angry that they henceforth avoid doing business with the seller.

Article 2 allows the parties to contract around the default rules for shipment. The circumstances of a case, trade usage or practice, and a course of dealing or performance also allow parties to evade the default rules of Article 2 for shipment. These latter options, however, involve proving the shipment terms in court, which is almost certainly going to ruin business relationships.

If there is a breach by the seller, then the default rules do not apply. The seller cannot deliver damaged goods to the carrier and shift the risk of loss onto the buyer. The issue with this is that the ability to discern whether the seller delivered damaged goods to the transit company is sometimes exceedingly difficult. Unless damage is clearly due to the rigors of transit, a buyer may not be able to tell whether the goods were damaged before or during transit. The resolution of issues like this often comes down to prudent, shrewd or accommodating businesspersons. A prudent seller admits that the goods were damaged when they delivered them to the carrier, especially when there is a future business relationship in the balance. A shrewd or dishonest seller will not admit the goods were damaged, especially when there is not a likely future business relationship in the balance. An accommodating seller will admit their mistake if the goods were damaged, and may accept the risk of loss even if they believe the goods were not damaged when they were delivered to the carrier.